US Mortgage Spread Drops to a 3-Year Low

‘If the Fed cuts interest rates as expected in September—or more than expected—mortgage rates may fall more than anticipated,’ said Redfin economist Chen Zhao.

Homes await buyers in Irvine, Calif., on Sept. 21, 2020. John Fredricks/The Epoch Times

The mortgage spread has dropped to its lowest level in more than three years, signifying better rates for home buyers and those looking to refinance, according to an Aug. 26 report from real estate brokerage Redfin.

A lower mortgage spread—the gap between 10-year treasury yields and mortgage rates—indicates lower mortgage rates, with a further decline suggesting a bigger drop in rates, the brokerage said.

The spread was 2.26 percentage points as of Aug. 22, down from about 2.5 at the start of summer and 2.68 a year earlier, Redfin said.

Home buyers are encouraged to sign deals when rates drop. Homeowners looking to refinance who earlier held back due to persistently high rates also may begin stepping forward.

The 30-year fixed mortgage rate, supported by Freddie Mac, was 6.58 percent for the week ending Aug. 21. This is the lowest rate registered since last October.

Redfin said there was more room for the mortgage spread to fall before returning to more typical levels, around 1.5–2 percentage points.

“Think of the spread like a restaurant meal,” said Chen Zhao, Redfin’s head of economics research.

“The treasury yield is the cost of raw ingredients, the mortgage rate is the price of the meal on the table, and the spread is the restaurant’s markup, which covers the cost of the chef, rent on the restaurant, profit margin, etc.

“Regardless of the cost of raw ingredients, if the restaurant has a lower markup, that lowers the customer’s bill. Similarly, regardless of the Fed’s actions, a lower mortgage spread helps lower mortgage rates.”

Fed Cuts in a Buyers’ Market

In a keynote address at the Jackson Hole Economic Symposium on Aug. 22, Federal Reserve Chair Jerome Powell said that the central bank may be open to cutting interest rates.

“With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance,” Powell said, mainly pointing to a deteriorating labor market.

Powell has so far resisted lowering rates, citing tariff-related inflation. However, he seems to have softened his stance. The likely scenario is that tariffs will result in a one-time price shift, he said.

“Of course, ‘one-time’ does not mean ‘all at once.’ It will continue to take time for tariff increases to work their way through supply chains and distribution networks. Moreover, tariff rates continue to evolve, potentially prolonging the adjustment process,” he said.

“Come what may, we will not allow a one-time increase in the price level to become an ongoing inflation problem.”

The next Federal Open Market Committee meeting, where the rate cut will probably be announced, is scheduled for mid-September.

Redfin’s Zhao said, “It’s important to note that if the Fed cuts interest rates as expected in September—or more than expected—mortgage rates may fall more than anticipated because the spread is also falling.”

Although mortgage rates closely follow the Fed’s interest rates, home buyers could face other challenges in a positively stimulated economy.

When rates dip, the broader economy gets a boost, resulting in higher purchasing power for consumers. When this happens, demand increases as more buyers flood into the market.

A competition uptick will have an impact on property prices, as sellers will raise prices.

Redfin said it is a buyer’s market at the moment, and many sellers are open to price negotiations.

“I’m telling serious buyers that they have leverage right now—and in the Bay Area, that has been unheard of for a long time,” said Josh Felder, a Redfin Premier agent in San Francisco.

“There’s less competition than usual because of economic uncertainty, and the market is no longer tilted in sellers’ favor. I just submitted an offer for a client on a townhouse in Mountain View, which is in Google land and would have gotten between five and 10 offers a year ago. We offered close to the asking price with no competition and got it. Prices are still high, but first-time buyers have a window.”

With a 6.55 percent mortgage rate, a homebuyer on a $3,000 monthly housing budget can afford a $439,000 home—that’s roughly $20,000 more in purchasing power since May, the company said.